If you want to survive in the Crypto Dark Forest for a long time, please understand Web3 wallet first.

Introduction:

The development of the Web3 industry is moving too fast, with new things emerging every day. Therefore, many daily thoughts are worth recording.

As the gateway to the Web3 world, we use wallets every day, but do we really understand wallets?

If you don’t understand various types of wallets, how can you dare to put your assets in a wallet?

Therefore, in order for us to survive longer and go further in this industry, please first have a deep understanding of the Web3 wallet.

If you want to truly understand the wallet, you need to first understand a lot of the underlying technology principles of blockchain, but the learning cost is actually very high.

Including myself, I have been working on wallet products for two or three years, but many familiar concepts are often vague, which is like being in the dark.

Currently, wallet products still have a high usage threshold for many ordinary users. Therefore, this article attempts to describe the underlying principles of wallets in simple language as much as possible, and help everyone develop strategies for using wallets.

1. Compare with banks

Instead of listing some obscure and difficult-to-understand concepts here, let’s try to use a traditional banking card commonly seen in traditional finance as an analogy:

Wallet address=Bank card number

Public Key = Bank Account

Private key = bank card password

Mnemonic=Master Private Key=Multiple Sub-private Keys=Multiple Bank Sub-account Passwords (Mnemonic is another form of private key)

Analogous to banks in real life, if we want to transact with others, we need to follow these steps:

(1) Create a bank card account and set a password

In blockchain, we first generate a private key through a random number generator. This private key is like a bank card password. Then, we generate a public key through the private key. This public key is like a bank account. The public key will then generate an address, which is like a bank card number.

We can find that the creation process is opposite to that of banks in the real world: banks first help you create an account and then let you set a password.

But just like with banks, even if someone knows your public key and address (bank account and bank card number), they cannot access your private key (bank card password).

（2）Transfer to another bank card account

If you want to transfer money to another bank account, you need to know the other party’s bank card number first, then input the transfer amount (which cannot exceed the amount in your own account), and then you need to input the bank card password. After verification, you can initiate the transfer.

Similar to this process, the only difference is that you don’t need to tell your key (i.e. bank card password) to anyone or any organization, you just need to sign digitally with your private key.

In the traditional financial system, banks store your bank card password and verify it when transferring money, making the bank a centralized intermediary.

But in the world of blockchain, your private key is known and saved only by yourself, and will not appear in any other scenario again. Only an algorithm is needed to prove that you own your private key.

(3) Bank Account Loss Reporting

If your bank card is lost or the bank card password is lost, you can freeze this bank account or reset the password after proving your identity to the bank.

But in the world of blockchain, once your private key is lost, it can never be recovered, and no one can freeze your account or change your password.

2. Structure of Multi-chain Wallet

Here is a summary of the various concepts mentioned above:

The wallet can generate or import multiple sets of mnemonic words. One set of mnemonic words can generate a master private key, and the master private key can derive multiple sub-private keys on different chains. Each sub-private key generates a fixed address.

However, for the convenience of managing multiple addresses on multiple chains, wallet applications generally encapsulate the concept of an ‘Account’, which means aggregating the first address generated on each chain as Account 1, and aggregating the second address generated on each chain as Account 2, and so on in sequence according to the derivation order of the child private keys.

In summary, wallets and accounts are product concepts created for user convenience, while mnemonic phrases, private keys, and addresses are technical concepts that exist as actual data forms in the blockchain.

The current trend is to encapsulate concepts such as mnemonic words, private keys, addresses, and chains in applications, and use concepts that are easier for users to understand, such as accounts.

This is also why there is a narrative of ‘chain abstraction’, which is also to reduce the confusion of technical concepts for users when using products. Don’t worry about cross-chain, gas fees, etc., and provide users with a similar experience to Web2 products.

3. What is a wallet?

In fact, there is no money in the wallet, just like our real-life wallet, which mainly contains bank cards, keys, and other items.

The same goes for the Web3 world, where money is stored on the blockchain. The term ‘wallet’ specifically refers to the system used to store and manage user keys (i.e., bank card passwords).

Each wallet contains a key management system. For some wallets, the key management system is the only module, while for others, there may be more extensive functions based on this, such as serving as an entry point for decentralized applications. A typical representative is the OKX Web3 Wallet.

If classified according to whether the private key is directly exposed on the network, it can be divided into hot wallet, cold wallet, and warm wallet.

(1) Hot Wallet: The hot wallet is an “online wallet”, a connected wallet that can be used with Bitcoin on a browser or mobile device.

(2) Cold Wallet: A cold wallet, also known as an ‘offline wallet,’ keeps the private key offline to prevent hacking and theft. Examples include hardware wallets.

(3) Warm Wallet: It is between the cold and hot wallets. Similar to the hot wallet, the warm wallet is also in a connected state. However, for security reasons, the warm wallet has a strict whitelist of addresses and cannot transfer funds to addresses outside the whitelist.

From a security level perspective, hot wallet < warm wallet < cold wallet.

4. How do ordinary users choose a wallet?

Asset isolation is actually the most important. You can use a three-tier wallet strategy: cold, warm, and hot. Divide your wallets into three categories:

(1) Hot Wallet (10% of assets): A wallet frequently used for transactions, do not store a large amount of assets, generally store assets to meet Gas requirements.

This wallet can be used to frequently play new projects. Even if it is really phished and causes some losses, at least it won’t cause serious damage.

(2) Warm Wallet (20% of assets): It is actually a segregated hot wallet, where assets with relatively low interaction frequency can be stored.

This wallet is suitable for holding liquidity-staking assets, as many projects now are staking-based. It would be very risky to keep these assets in a hot wallet for a long time, so you can isolate a hot wallet as a warm wallet.

The assets in this wallet can also be used at any time, but the frequency of interaction is much lower than that of hot wallets, and the risk is also much lower.

(3) Cold Wallet (70% of assets): It is best to store large assets in a hardware wallet in cold storage, preferably without any interaction at all.

Of course, asset isolation in multiple types of wallets actually sacrifices efficiency for security. The best practice is to have a one-stop platform that integrates multiple wallet types to manage assets.

There is currently no lightweight layered wallet on the market, but the OKX Web3 wallet is most likely to emerge.

As a super app, OKX Web3 wallet has integrated multiple types of wallets, but there is still a lack of interoperability and fund management strategies for multiple types of wallets. We hope that in the future, it can truly manage user assets in a one-stop manner.

5. Summary

By now, everyone should have a basic understanding of the overall concept of Web3 wallets.

More importantly, do not use unknown wallets at will in daily use, because there is no security guarantee, and do not casually copy and paste your mnemonic and private key, once leaked, will lose all your assets.

Since everyone has entered the Web3 world, we must tread carefully at every step, only then can we have a chance to reach the other side.